Trading the MXN vs. the USD in the US 2024 Elections
If you’re on the hunt for the next big short, look no further—this is it. The 2024 U.S. presidential election is shaping up to be a high-stakes event with major implications for the Mexican peso (MXN) against the U.S. dollar (USD). In this article, we’re zeroing in on what we believe to be the most compelling “big short” opportunity: a Trump clean sweep scenario. We’ll break down how the 2016 election impacted the peso, explore potential outcomes in 2024, and give you a clear trading strategy to capitalize on what could be a market-shaking event. Let’s delve into the details.
1. 2016 Election Overview
The 2016 U.S. elections were a watershed moment for global markets, and the Mexican peso was one of the currencies most affected by the political upheaval. As Donald Trump rose to prominence with his unorthodox campaign style and provocative policy proposals, the peso became a barometer of market sentiment regarding U.S.-Mexico relations.
- Volatility and Depreciation: In the months leading up to the 2016 election, the peso became increasingly volatile. Trump's campaign rhetoric included harsh criticism of NAFTA and threats to impose significant tariffs on Mexican goods. Such statements created a sense of uncertainty among investors, who feared that a Trump victory could destabilize the strong economic ties between the U.S. and Mexico. As a result, the peso experienced sharp depreciation against the U.S. dollar, reflecting growing concerns about the future of U.S.-Mexico trade relations.
- Trade and Economic Concerns: Mexico’s economic well-being is closely tied to its relationship with the United States, its largest trading partner. Trump's campaign promises to renegotiate or even terminate NAFTA sent shockwaves through the financial markets. Investors, wary of the potential fallout from a deteriorating trade relationship, began selling off the peso. The market’s reaction was driven by the expectation that Mexico could face significant economic disruptions, including reduced export opportunities and increased trade barriers, which would negatively impact its economy.
- Post-Election Reaction: The aftermath of Trump's victory in November 2016 saw the peso continue its downward trajectory. The currency plummeted to historic lows against the dollar as the market grappled with the uncertainties of the incoming administration’s trade policies. Investors were particularly concerned about the possibility of abrupt changes in trade regulations and the imposition of new tariffs, which would further strain Mexico’s economy. The peso’s steep decline reflected these anxieties, as market participants rushed to price in the expected risks.
- Policy and Market Adjustment: However, as the Trump administration’s policies became more clearly defined over time, the peso began to stabilize. The renegotiation of NAFTA, which culminated in the United States-Mexico-Canada Agreement (USMCA), provided a clearer framework for trade relations. While the new agreement did introduce some changes, it ultimately maintained a trade relationship that was favorable to Mexico, alleviating some of the market’s initial concerns. This clarity helped the peso recover from its initial losses and find a more stable footing in the months following Trump’s inauguration.
In summary, the 2016 U.S. elections had a profound impact on the Mexican peso, primarily due to the uncertainty surrounding U.S.-Mexico trade relations. The peso’s initial sharp depreciation reflected the market’s fear of disruptive economic changes, but as policies became more defined and the USMCA was implemented, the currency began to stabilize.
2. 2024 Election Overview
As we look ahead to the 2024 U.S. presidential election, the stakes for the Mexican peso are once again incredibly high. The outcome of this election could lead to significant shifts in U.S. trade, immigration, and economic policies—all of which have the potential to influence the MXN/USD exchange rate. Here are the key factors to watch:
- Election Uncertainty: The lead-up to the election is likely to be marked by significant uncertainty, as candidates present divergent views on critical issues that impact U.S.-Mexico relations. This uncertainty tends to generate increased volatility in the FX markets, particularly in currency pairs involving the USD. Traders will be closely monitoring election polls, debates, and campaign promises, as these factors can cause significant fluctuations in the MXN/USD exchange rate. The closer the race, the more pronounced the volatility is likely to be, as markets attempt to price in the various possible outcomes.
- Policy Implications: The specific economic and trade policies proposed by the presidential candidates will be crucial in determining the direction of the MXN/USD pair. For instance, if a candidate advocates for significant changes to existing trade agreements like NAFTA (now USMCA) or proposes new tariffs on Mexican imports, this could lead to a depreciation of the peso as investor confidence wavers. Conversely, a candidate who supports strengthening trade relations with Mexico could bolster the peso. The market will react not only to the final election outcome but also to the anticipated policy shifts during the campaign, making it essential to stay informed about each candidate’s platform.
- Economic Indicators: Economic data from both Mexico and the United States will play a pivotal role in shaping the MXN/USD exchange rate during the election period. Key indicators to watch include interest rate decisions by the Federal Reserve and the Bank of Mexico, inflation rates, and GDP growth figures. These economic fundamentals will influence investor sentiment and, consequently, the strength of the peso relative to the dollar. For example, if the U.S. economy shows signs of slowing while Mexico’s economy remains stable, this could lead to a strengthening of the peso. Conversely, if U.S. economic data outperforms expectations, the dollar could gain strength against the peso.
- Global Market Conditions: The broader global market environment will also impact the MXN/USD exchange rate. Geopolitical events, shifts in global risk sentiment, and changes in commodity prices (particularly oil, which is a significant export for Mexico) can all affect the peso. For instance, rising oil prices could support the peso by boosting Mexico’s export revenues, while a global risk-off sentiment could lead to a flight to the safety of the U.S. dollar, thereby weakening the peso. Understanding these broader market dynamics will be crucial for traders looking to navigate the MXN/USD pair during the election period.
In summary, trading the MXN/USD during the 2024 U.S. presidential election will require a comprehensive understanding of political developments, economic indicators, and global market conditions. By staying informed and applying sound trading strategies, traders can navigate the potential volatility and make well-informed decisions.
3. Scenarios for Upcoming Events
Given the current landscape, traders can prepare for several scenarios when trading the USDMXN in the upcoming elections. Each scenario is based on different potential election outcomes, and each presents unique opportunities and risks.
Scenario 1: Trump Clean Sweep (Trump Presidency, Republican House and Senate)
- Domestic Policy: In this scenario, we would expect Trump to push for an extension of the 2017 tax cuts and introduce new immigration controls, both of which would likely have significant implications for U.S.-Mexico relations.
- Foreign Policy: With a strong mandate, Trump is likely to reduce support for foreign engagements, such as aid to Ukraine and Taiwan, and instead focus on domestic growth and job creation. This inward-looking approach could lead to a more protectionist stance in trade relations.
- Trade Policy: One of the most critical areas of concern in this scenario is trade. Trump’s administration could implement an increase in tariffs over the medium term, which would likely hurt Mexico’s export-driven economy. The anticipation of such policies could lead to a preemptive sell-off in the peso as investors brace for tougher trade conditions.
- Fed Policy Impact: The expected loose fiscal policy, characterized by tax cuts and increased domestic spending, would likely be countered by tighter monetary policy from the Federal Reserve. This combination could lead to higher U.S. interest rates, making the dollar more attractive relative to the peso and contributing to the peso’s depreciation.
| Period | MXN/USD | US 10Y |
|---|---|---|
|
4Q24 |
20.7 |
3.90 |
|
2Q25 |
21.5 |
4.20 |
|
4Q25 |
22 |
5.20 |
This scenario presents a significant opportunity for traders to short the peso, given the likely negative impact of Trump’s policies on Mexico’s economy. The combination of tighter U.S. monetary policy and protectionist trade measures could drive the peso lower against the dollar.
4. How to Trade the #1 Scenario: Trump Clean Sweep
The Trump Clean Sweep scenario stands out as the most compelling opportunity for trading the MXN/USD pair during the 2024 U.S. presidential election. With Trump securing the presidency and Republicans controlling both the House and Senate, the market will likely anticipate a tougher stance on U.S.-Mexico relations. Even if immediate actions are not taken, the perception that they will be could drive significant depreciation in the peso.
Trade Entry Strategy
Once the election results confirm a Trump Clean Sweep, the strategy is clear: enter the market with a single unleveraged short position on the peso. This initial position allows you to capitalize on the anticipated depreciation of the peso without overexposing yourself to risk. As the market begins to move in your favor and the peso weakens, consider adding to your position incrementally. This approach enables you to maximize gains while managing your risk exposure effectively.
Given the high volatility expected in this scenario, it’s essential to set a wide stop-loss—a couple hundred pips from your entry point. This wide buffer is crucial to avoid being stopped out by the initial market fluctuations that often accompany such significant political events. The goal is to stay in the trade and ride the wave of peso depreciation as it unfolds.
Key Opportunity: Election Night Surprise
One of the most significant profit opportunities in this scenario could arise if the market is caught off guard on election night. Suppose the prevailing expectation going into election night is that Harris will win, but the actual results reveal a Trump Clean Sweep. In that case, the market will likely react sharply, leading to a rapid and substantial decline in the peso. Being positioned ahead of this outcome ensures that you can capitalize on the sudden shift in market sentiment and lock in significant profits as the peso depreciates.
Alternative Strategy: Pre-Election Positioning
Another strategy worth considering is taking a short position on the peso in the weeks leading up to the election if Trump shows a lead in the polls. As the market begins to price in a potential Trump victory, the peso is likely to start depreciating in anticipation of the expected policy impacts. Entering the market early allows you to take advantage of this pre-election trend. However, as election night approaches, it’s crucial to manage your risk by moving your stop-loss to breakeven or locking in some profits. This approach ensures that you are not holding a losing position if the election results do not go as expected.
Conclusion
The Trump Clean Sweep scenario offers a clear and decisive trading opportunity for those looking to capitalize on the 2024 U.S. presidential election. By positioning yourself correctly and executing the outlined strategies, you can effectively navigate the election-related volatility and profit from the expected depreciation of the peso. Take action as outlined and stay disciplined in your approach to maximize your trading success. The potential for a “big short” in this scenario is significant, and with careful planning, you can position yourself to take full advantage of the market movements that are likely to follow a Trump Clean Sweep victory.